Economics is applied morality

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The ignorance of many highly experienced economists to the moral foundations of their work is quite alarming. As a group, economists typically internalise the utilitarian morality embedded in their methodology to such a degree that they are happy to promote economic theory and practice as an objective scientific approach.

To set a more honest course for the discipline I pushed hard during the development of Australian Learning Standards in Economics to include criteria for the teaching of moral foundations, in addition to professional ethics. Indeed, I have argued previously for adopting standards of professional ethics in economics. You know, to cover the usual expected standards of professionalism such as not making comments in public forums without disclosing financial interests.

I couldn’t get the actual words morals and ethics into the new learning standard. But the result was very good I think, with the fifth learning standard being called Reflection, and containing the following.

Bachelor graduates will be able to reflect on the:

  • nature and implications of assumptions and value judgments in economic analysis and policy
  • interactions between economic thinking and economic events, both historical and contemporary
  • responsibilities of economists and their role in society.

You wouldn’t believe it, but one concern was that there may be insufficient expertise within the cohort of university professors to achieve this standard. So in the interests of raising awareness, I want to provide a very brief comment on the moral foundations of economics.

Utilitarianism is the moral foundation of economics. The idea of the greatest good for the greatest number is intuitively appealing. But applying a utilitarian framework relies on value judgments about the desires, and a comparable measure of their intensity, of every individual. Some of the defining debates in economics over the past century have centred around the measurement and comparability of utility between individuals.

Thus any application of economics requiring estimation of costs or benefits is applying a judgment about the worthiness of competing desires of the population at large. That judgment is necessarily a moral one.

Further, most economic analysis applies utilitarianism in an ad hoc manner, by considering only the population within national borders. Unless you are a ‘national utilitarian’ (a distinct moral position), it can never be appropriate to consider domestic policy in terms of the utility of local residents while ignoring effects on the utility of those abroad.

A truly utilitarian analysis must always and everywhere adopt a global perspective, which would make it exceeding difficult to justify any domestic policy in the developed world that didn’t entail a massive redistribution from that country’s wealthiest to the world’s poorest.

Then there’s the moral position that only the utility of humans counts.

Other times economic analysis is more clearly a case of applied morality. In analysis of public health economists usually appeal explicitly to the idea of utils, or some metric of quality-adjusted life years. The adoption of this metric relies on a moral judgement, for it implies that the elderly are less deserving of health resources than the young. But an equally valid moral position is that the elderly are more deserving as a repayment for their lifetime of work contributed to the community. Another moral position is that the young are easily and cheaply replaced, while the wisdom held in those elderly bodies has a high value and is costly to replace.

In more general terms we face the morality problem when measuring progress.  Economists prefer GDP because their utilitarian framework implies that more consumption leads to greater utility. Apart from the obvious problem that GDP only includes goods traded in markets, ignores household production and externalities, it also contains a compositional problem. 

What I mean is that many of the ‘goods’ that people trade are actually what we would call precautionary spending and increase utility only because they compensate for a loss of utility arising from outside of the market. Home security is one example.

Isn’t it better, morally, to not need to have home security, than for people to feel the need to spend 5% of their income on security, including locks, alarms, surveillance, insurance and so forth?

Other measures of progress have been proposed to overcome these issues. Each of these simply reflects and alternative moral judgment.

Lastly, there are the moral positions surrounding the degree of wealth distribution, the degree of community support to offer the unemployed, the elderly, and so forth that are perennially topical. These are all moral judgements, which are easy enough to see when we get down to the nitty-gritty debate and words such as worthy come out.

There is of course much more to the story of morality in economics than can be covered in this short post. One important thing to remember is that in practice utilitarianism can be, and has been, applied to justify almost every policy position.

What we need to remember is that you can’t escape morality in economics. But understanding the moral foundations of economics is the best way to properly grasp the limits of economic reasoning. It is my hope that the next generation of economists will learn to discuss and criticise the moral foundations of economics, and by doing so see policy debates as far more complex than is typically realised when alternative moral perspectives are ignored. 

Comments

  1. Yes. And the professed amorality of many economists is in itself a moral stance. Morals and ethics are the ‘because’ of political economy. Put it in a bottle or hold it in your hand – this is before us every day in every way.

  2. Excellent post!

    Distorted moral and misuse of utilitarian ethics is by far the biggest problem we face today. System on it’s own (whether capitalist or socialist or any other) doesn’t come with embedded moral values, it’s the overall moral in the society’s ruling class (inc media) that makes society fair and prosperous or not.

    Utilitarian ethics is very convenient for manipulation because it takes assumptions as inputs for “utility calculations”. It’s very easy to argue a common good and than use it for whatever immoral goals.

  3. Interesting idea as a matter of fact yesterday I was having this exact discussion with my wife. My position was that in the course of the unfolding Asian century the the moral basis for Economics, Business law and International law would shift from a Western Theology / Philosophy basis towards an Eastern Theology / Philosophy basis.

    Whats the difference? Ahhh Huge…so many of our western / International laws and social customs find moral basis in Judeo/Christian Theology contrast this with China where many would say the moral basis for all Chinese social customs and Laws is Filial piety (孝, xiào).

    Whats this got to do with Economics?

    In my mind Economics is the tool we use to support our social goals like income redistribution, which is absolutely necessary because without this we would quickly develop social unrest. From my experience most Chinese dont share our western social goals, as a matter of fact they differentiate themselves (and their families) by the way they create and reinforce extended family wealth .

    Its hard to put this into words but the difference is huge, In China there’s a tough love underpinning all social programs and it starts with the idea that you should do something useful for both yourself and your family.

    As China’s sphere of influence expands its morals will invade our space, whether we like it or not, this is something we’ll just need to get used to.

    • Thanks Bob

      Can you link us to something more about this as I find it fascinating and useful to my current project.

      Chinese social customs and Laws is Filial piety (孝, xiào).

      • Hi Tonydd,
        I’ll try to find something but its a difficult area to quantify, its like what we used to call the Korean “Maybe” problem, also Japanese “Hai” problem neither response should be taken to mean or in any way imply “yes”.

        The same thing goes for Chinese interpretation of most contracts, there is a huge dose of “caveat emptor” built into their reading / understanding of any contract, they’d expect to walk away from unfair/unfavorable contracts, just as they’d expect you to simply wall away. The only exception to this is are events that would cause them to loose face and interestingly bank debts.
        This makes all Chinese business an unending negotiations process. Renegotiation is whats expected at every twist and turn.

        The only constant is the process by which they try to create value for their “family” which should not be understood as just immediate relatives rather its really their keiretsu or maybe a better analogy is their sphere of influence.

        So unlike western value systems where we’re expected to care about things we have absolutely no control over (drunks in the park, unemployed youth…) within most eastern systems there is added respect for acknowledging that this is not your problem (especially if you are seen to be taking care of the wayward elements within your own sphere)

      • Flawse, China Bob, as someone who has closely followed a decades worth of Russian Chinese negotiations on oil and gas (and who has spoken at length with the Russian side on progress of these – bearing in mind that the usual international perception of negotiating with Russians is that they all too often assume a winner takes all approach and dont like negotiating from a position of equality) is that the Chinese must be truly the last word in implacable obfuscation when it comes to putting things on paper, and the absolute end point of infuriation when it comes to living up to contractual clauses.

        I have seen people in tears, and more than once I have been told there is a deal ‘on’ only to find it disappears on the whim of some official, or some seemingly miniscule technicality.

        Without ever having negotiated anything with Chinese I always assume it must be like squeezing large pimples inside ones nose.

    • Dear China-Bob,

      We don’t have to get used to the approach of an autocracy such as China, but if you want to regress you can live there now and share the joy with over a billion others – perhaps you can take lots of clean water for the millions that lack basic necessities.

      Their filial piety and other aspects of their culture are much romanticised and amount to jostling for inheritance and the remnants of a feudal system not long gone – we really don;t want to regress a couple of hundred years and romanticism about zen has not place in our society – just ask a rich Chinese storing a nest egg in our property market, many leaving wives behind here as they return and engage in practises we had better not discuss here – lets say they are not noble.

      Lets hope Australia moves continues to progress – once China end female infanticide, atrocities against Uighurs, not to mention Tibetans and removes many many more from poverty and illiteracy then perhaps you can return from China and teach us some lessons.

      They also have to address looming age and gender disparities that they manifested with a populate policy followed by a one child policy. I could start to recount personal experiences but it would be way to gory for you westerners.

      The study of economics has a long way to go but lets please draw attention to worthy models of progress.

      Gunnamatta – Without ever having negotiated anything with Chinese I always assume it must be like squeezing large pimples inside ones nose *** may I suggest you do but don’t use your money – a persons word or a contract has a level of meaningless that’s difficult for us to appreciate – it’s an authoritarian country and a country’s government can be said to reflect the nature of its people

  4. Rumplestatskin – good to see articles about broader topics like this every now and then.

    Maybe a bit of a different perspective – but I don’t think the utilitarianism framework is deficient (morally or otherwise). It is quite robust. Valuations which require value judgments are hard, yes. But they need to be made. Sometimes, confronted with a policy decision, it is not useful to just say that this item requires value judgments and so we can’t do it.

    As you’d already appreciate (probably better than me!) there are non-market valuation techniques such as revealed preference which are really quite defensible.

    Sometimes however, the item is so complex, subjective or contested that it is not practical (or useful) to try and value it. That doesn’t mean utilitarianism is wrong and that a true value for the utility tied to that item/willingness to pay doesn’t exist. In those situations maybe it is better to supplement with a bit of qualitative analysis then try and force fit everything into a quantitative approach or avoid making a policy decision because it is just ‘too hard’.

    Also, cost-benefit analyses needs a reference group. It could be global but equally and just as valid it could be the country, a state or territory, a local government area or a corporate entity (of-course in this special case it becomes a financial analysis).

    It is a normative statement in itself to say that overseas impacts should be equally weighted against domestic impacts. That is just not reflective of human nature and many, myself included, would argue that it ought not to. I’m biased towards my immediate family in the first instance, then my extended family, then my friends, then my community, then my country and so on…… I would actually argue that someone who doesn’t look out for their family first is failing a moral obligation. You could argue this is ‘selfish’ and that’s sure that’s one valid viewpoint but not one that everyone has to agree with (I’d contend that the vast majority wouldn’t anyway).

  5. You forgot any sentient beings on other planets, or intelligent non-humans on this planet.

    Recent discoveries have shown that dogs and dolphins can discover and use hallucinogens and it is well know that various other animals use alcohol in rotting fruits. Surely, such human-like traits earn them a seat at the table.

    Utilitarianism has always seemed to devolve into ‘the greater good’, as defined with the party with greater power. Utilitarianism is a fig leaf for this or, to channel Mao, all utility comes from the end of a gun.

    • Moody…you want to be around in some forests when the trees flower, there is an early morning shower, followed by warm sunshine…the parrots get absolutely p….d out of their minds, the racket is unbelievable and thee must be lots of baby parrots born a little later!
      Now where else does that happen? 🙂

  6. KlimashkinaSydney

    My points, for what they’re worth (not much):

    – Economics has been hi-jacked by mathematics geniuses (although physics drop-outs I’m guessing), who like tidy models, and not the muck of the real world. Most of the “muck” of the real world is precisely the arguments that arise out of moral arguments. Moreover this has dominated over the last 50-60 years; that economics is a science would be an odd thought to a philosopher 100 years ago; today the idea is almost mainstream.

    – Adam Smith was a moral philosopher. Perhaps any reading of Wealth of Nations should be done alongside his Theory of Moral Sentiments.

    – It’s just easy for decision-makers to be guided by making the preferred metric “higher” or “bigger.” This makes GDP so easy for the policy-maker class. If there were easy understood moral metrics, perhaps we’d be in a better place. Apparently there are some out there – Pareto equality I think(?) – but they are ignored, or do not focus on the overall production of society but only distribution. Or, most likely, politically difficult to maximise.

    – Unfortunately Economics as we have it at the moment is the best we can do with… for now?

  7. Agh, goodness…so good to read this sort of thing…

    I have a little saying that I would like to share (which I think agrees with the post):

    “Value comes from Values”.

    That is, what people desire, and the relative weight (read: valuation) that someone places on something comes first, and foremost, from their value system; and, said value system comes from their belief system, or Worldview.

    Morality/Values/Worldview/etc is inextricable from Economics, because Economics is an arbitrary sub-set of human thinking, and human thinking is inextricable from Morality/Values/Worldview/etc.

    Thanks again, Rumples.

    Cheers,
    Stewart

  8. Interesting post. Thanks.
    The national focus arises because for economists considering normative questions of policy that involve redistributive aspects, the relevant policy instruments (taxes, transfers, regulation) are typically applied at the national level. The policymakers that economists seek to influence are making policy at the national level.
    While many economists may wish that this were not so, they nevertheless feel that they have something to offer to policymakers operating within the existing political structures.

  9. Well said Pat.

    Just like, if you’re an employee (agent) of a company (principal) you have a moral obligations to the shareholders of that company to promote and protect their interests (profit). If the company’s shareholders agree that wider interests are also important (e.g. sustainability, community development etc.) then certainly you have an obligations to pursue those objectives as appropriate.

    Economists are agents for the government (tax-payer). They have a moral obligation to promote the interests of that group (everyone in the country that pays their taxes).

  10. Rumples what are your thoughts on the pete Boettke view of political economy (and I’m not talking Austrian economics, but instead what he calls robust political economy)? I tend to agree with it, at least philosophically.

    Also have you read his piece on the social responsibility of economists? From the bit I’ve read I didn’t much like it but need to give it a further read.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2310305

    • Ha! Boettke’s rant you link to is unbelievable.

      Actually, no it’s not. It is exactly the response I’ve had from numerous true believers in economics.

      He even loads the whole essay with this ideas of spontaneous order, self-correcting free market economy, and other religious idols worshipped by never witnessed.

      It’s an uphill battle. I usually respond by asking whether they’d take medical advice from a doctor who was under no compulsion to act ethically and was funded by a variety of unknown pharmaceutical companies.

      They then back-peddle into some rationale about how economics is different.

      I’ll look into this dea of ‘robust political economy’ a bit more.

      • http://papers.ssrn.com/sol3/papers.cfm?abstract_id=869124

        http://andrewnorton.info/2011/05/13/robust-political-economy-or-why-classical-liberal-institutions-are-best/

        If you know classical liberalism you pretty know robust political economy.. I like Boettke’s paper, above. I know Boettke’s social responsibility paper is pretty bad, but most of his ideas are channelling Hume and Smith – not such a bad place to be looking, philosophically, IMO.

        I work in a regulatory setting, and every time I talk to industry, or read procedures for how we are supposed to regulate, I keep coming back to the insights of Mises/Hayek. I know they are perceived to be quacks by many, but they are truly useful to channel. Would hate to be a regulator setting prices. Mises and Hayek spell out how we really can’t do this well.

        I think the main problem with Boettke et al is that the institutional setting for their ideas to work is (almost) as far fetched as is an effective highly interventionist government. That is, truly free markets will never exist (although it is good to aim for, as it is robust political economy), because such an environment is a product of political decisions.

        anyway ive got stuff to regulate

  11. Was actually thinking about my job on the way to work this morning and what it means in terms of GDP. I produce information that informs decisions and citizens – but I produce no products or services. I guess then my job – while contributing to GDP – is an intermediate good, which hopefully leads to more efficiency down the track. Does this mean such jobs (some might call them bullshit, I disagree) should not be included in GDP?

    I too don’t think spending money on security adds to welfare. Further, you could probably argue most lawyers surely are just billing for transaction cost related work. Maybe their whole industry should be removed from GDP? Strikes me that the bigger and more sophisticated we get as a society, the more we spend on transaction and information – simply throughputs to eventual production. I guess then there is a difference between GDP – nominal spending which is peoples’ income – and actual spending that contributes materially to someone’s enjoyment of life. But then you could say that economy is more than just coffees, entertainment and mining – it is all human endeavour that involves money and transaction, so hey maybe just include it all and be done discussing it as a measure? as long as we augment with GDP with other measures – such as environmental and education outcomes, and aren’t slaves top spending, then maybe that’s fine.

  12. Economics is the science of optimising …
    Optimising what?
    This is the question. Some think the answer is GDP, others think it is profit in some market. Perhaps it is dollars. Or is it the values of society?